In the midst of my current four-part history of the US markets, we all probably noticed the VIX gaining 43% to close from the sub-10’s on Friday to a staggering 16.74…
Now that’s a little history in the making, no?
For months now, I’ve been a bit awed by a market that seems to have no fear of a big bad market wolf. Yet it appears as if that wolf peaked out from behind the bushes last week.
The question is: should we be looking for a brick house in which to hide our ass(ets) just yet?
The main stream financial media, of course, is still not worried. The bull-spinners pegged the sudden VIX spike to the increasing tensions in N. Korea. Apparently, the very fact that the weekend passed without a nuclear exchange was enough to calm fears and send the VIX down 20% and the DOW up 135 points by Monday.
Talk about whistling past the wolf’s lair…
But I don’t think Friday’s spike and Monday’s recovery was a one-hit-wonder. In short, volatility is heading to an exchange near you…The wolf is starting to growl and markets (as well as a VIX trading at 50 year lows) are heading for a long over-due correction.
My advice: if you’re not already taking profits, take advantage of this rally, and then consider a pretty heavy allocation to cash.
Why?
Because there’s more to this nervous VIX than Korean dictators and Trump tweets. Nuclear war isn’t gonna happen, but a market correction is.
It’s not that saber rattling between nuclear powers or even Trump’s consideration of a possible military solution in Venezuela aren’t, in and of themselves, massive red flags of geopolitical risk. They are. But sadly, that’s only the beginning, for we are also marching into a host of other text book market risks, namely: homegrown political risk; asset-bubbles in bonds, equities and real estate; egregious PE backed LBO’s, a dying retail sector, and—last but certainly not least—a debt ceiling fiasco on the horizon.
Nor am I alone in these concerns. As indicated elsewhere, some of the top investors in our markets are worried as well. They see egregiously over-valued stocks and bonds as well as a nation’s capital woefully un-able to deliver—from the White House to the Federal Reserve.
Today, stocks are trading at 25X trailing 12-month earnings, small-caps are defying all standards of risk management, European junk bonds (thanks to the ECB’s Magical Money Printer) are now offering lower yields than US Treasuries.
Yep. Junk bonds in the EU give you less yield than a US Treasury.
That’s crazy.
It’s also further indication of just how weird things get when central banks solve old problems by creating new ones.
With central banks rather than market participants buying bonds, it’s no wonder that prices are up and yields are down. But those central banks, like all good things, must come to an end sometime…
When? How?
I can hardly predict anything in this odd backdrop of political chaos, Charlottesville tensions, market bubbles, divided politics and eerily ignored market risks in everything from the girating VIX to the yield curve… Nevertheless, these and other market distortions (i.e. central bank created land mines) are likely to come to even more of a head when things really start to heat up in DC this fall.
Heat up, or melt down, that is.
On the last day of September, our country is officially broke. The political will and economic consensus necessary to face our debt ceiling may just be the last straw in this risk-laden market backdrop.
Yes or no, the above-referenced risks are all nevertheless real. So I’ll say again: keep your eyes on the 10-year yield and not the market cheerleaders. As any little piggy facing a market wolf knows: better safe than sorry, no?
Friday’s sudden VIX rise and Monday’s equally expected VIX fall are classic precursors of more to come.
So where’s your fear index at in times like these?
